On the menu today: Gas prices declined a bit after peaking in May at a national average of $4.60 per gallon for unleaded gasoline; the U.S. Energy Information Administration had the national average down to $4.20 at the end of August. But that’s . . . still pretty darn high, compared to the $3.27 it was a year ago. But the unleaded price is a bargain compared to diesel fuel these days, which just hit a record high. And unfortunately, the outlook for diesel prices is bad news, all the way from here to November, and likely beyond. Read on, if you dare.
Diesel Downer
On May 17, 2022, this newsletter looked at what was driving up the cost of diesel fuel. Back then, the national average cost of a gallon of diesel fuel was $5.57.
This morning, the national average cost of a gallon of diesel fuel is $5.85, a new record.
Because almost everything you buy at a store gets there on a truck, and because slightly more than three-quarters of all trucks run on diesel fuel, it is exceptionally difficult for Americans to feel like the cost of living is growing more manageable if diesel fuel prices remain high.
The popular scapegoat in certain circles is going to be Ukraine’s “long range sanctions” — drone strikes — which have blown up a whole bunch of Russian oil facilities, and reduced Russia’s abilities to reduce and refine oil. In June, the Russian government banned the export of diesel oil, and the Russian government recently extended that ban until September 30, with a “general ban on fuel exports is in effect in the Russian Federation until January 31, 2027.”
However, the war in Iran is much more disruptive in terms of the amount of oil that cannot reach the market. From the European Central Bank, July 27:
Military strikes between the United States, Israel and Iran in late February 2026 led to the closure of the Strait of Hormuz. This interrupted the transit of around 20 million barrels per day (mb/d), equivalent to one-fifth of global oil supply. Although Saudi and Emirati pipeline networks have partially mitigated the disruption, the conflict has nevertheless resulted in an average supply loss of around 14 mb/d so far, representing 14 percent of global oil supply. By contrast, the war in Ukraine reduced oil supply by only around 1 mb/d, or one percent of global output, since most of Russia’s 10 mb/d of oil production continued to reach world markets despite the sanctions put in place.
If you want to lower the cost of something, you need to either increase the supply or decrease the demand.
Decreasing the demand is not likely to be an option. There are 17 million commercial vehicles registered in the U.S., and 76 percent of them run on diesel fuel; 97 percent of Class 8 highway tractor-trailers, which are the big trucks you’re used to seeing on the highways, run on diesel. Yes, you’re starting to see natural-gas-powered trucks and hydrogen-powered trucks, but any changeover in the U.S. trucking fleet’s fuel supply is going to be extremely gradual.
In fact, we’re reaching the time of year when demand for diesel fuel will increase, with farmers needing it for their harvesting machines. Last month, Drew Kientzy, a University of Missouri agricultural analyst, told Axios, “Harvest is the single operation that uses the most fuel and runs from now through November for most of the country.”
And if you’re hoping the approaching spring south of the equator would offer some slack in diesel demand . . . unfortunately, no:
The combination has tightened the global market for distillates precisely when Northern Hemisphere agriculture is entering harvest and Southern Hemisphere producers are preparing for planting, creating simultaneous seasonal demand across two major agricultural cycles.
U.S. inventories offer little cushion. Distillate stocks, which include diesel and heating oil, entered September at exceptionally low levels, while East Coast inventories dropped to about 19.3 million barrels in the week ended August 28, the lowest level in records dating to 1990.
Also keep in mind that about 90 percent of U.S. school buses run on diesel fuel; that’s about 432,000 bright yellow buses coast to coast that use diesel every school day.
There is no short-term way to reduce demand for diesel fuel for the nation’s truckers, farmers, and school buses.
This leaves the option of increasing supply. But note, as I pointed out back in 2022, this isn’t just a matter of increasing access to oil, like the new controversial deal with one of Delcy Rodríguez’s cronies down in Venezuela. (The challenges to increasing Venezuelan oil production are substantial, and are unlikely to be overcome quickly.)
“Drill, baby, drill” is a crude, unrefined argument. I mean that literally; we need to refine, baby, refine, and total U.S. refinery capacity has remained about the same for the past decade.
The good news is that U.S. oil refineries are operating at 96.5 percent of capacity, according to the U.S. Energy Information Administration. That adds up to 17.9 million barrels per day. In January 2025, when President Trump took office, it was at . . . 18.3 million barrels per day.
Refineries need to periodically shut down for scheduled maintenance. Marketplace explains that, with supplies constrained and demand high, oil refineries are looking at what maintenance is necessary and what can be postponed:
Now, upcoming run-of-the-mill maintenance adds even more pressure on markets.
U.S. refiners don’t want shut down parts of their refineries: they’re raking in high margins right now from every barrel they make.
“You’re going to do everything you can to keep that refinery running,” said Tom Seng, a professor of energy finance at Texas Christian University. “We’re not talking band-aids. You’re going to do the required maintenance at a minimum.”
Across the U.S., companies have been running their refineries to make as much gasoline, diesel and jet fuel as possible. Seng said that at some point, their equipment will need some work.
“You can’t be running 97 percent continually for months and not have something break,” he said.
The Trump administration has the right approach here, wanting to increase refinery capacity. Earlier this year, the administration touted the announcement that “America First Refining will build a 168,000-barrel-per-day refinery in Brownsville, Texas, a deep-water port with direct rail and sea access, supported by investment from India’s Reliance Industries.” This is the first new major U.S. refinery project in roughly 50 years, which is excellent news. The bad news is that it is “expected to be fully operational by 2029.”
Earlier this week, the Wall Street Journal laid out why oil companies are content to keep refinery capacity where it is or make small increases. They figure by the time they finish building a new refinery, five years down the road, the entire market may have changed:
But building new refineries isn’t economic — it would require an investment of several billion dollars and three to five years of construction. The industry expects the energy market to have found its footing long before then. . . .
America has been closing refineries for decades — it has 128 fewer than it did in 1982. The newest was completed in 1977; roughly a quarter were built more than a century ago.
The obstacles to building new ones are formidable. For one thing, acquiring the myriad permits needed from federal, state and local governments would be a major undertaking. The oil industry has tried for years to convince Congress to overhaul the permitting process to clear the way for pipelines and other energy infrastructure.
That Marketplace piece above closes by quoting Joe DeLaura, a senior energy strategist from Rabobank, concluding that as diesel prices climb even higher, inflationary hits will follow about two months after.
You know what happens about two months from now?
The midterm elections.
ADDENDUM: Republicans facing those midterm elections would be wise to heed the advice of Erick Erickson, arguing that attacking Democrats isn’t enough; you also have to emphasize what you’ll do if you keep power:
They need to be shown two futures and asked which one they want to live in.
The Republican future is not complicated. Police are allowed to police, and violent criminals and the dangerously mentally ill are kept off the sidewalk, instead of left there to die in the name of compassion. The border stays secured and the cartels get treated like the enemy they are. Inflation, now around 3 percent, keeps falling until wages are clearly ahead of it again. There is real work left. We have not finished cleaning up the economy Joe Biden left, and the tariffs this administration keeps defending are raising prices on the very families the GOP needs. Republicans should say so and then go fix it.
The Democratic future is not a guess either, because they keep announcing it. Zohran Mamdani wants a rent freeze, a government grocery store, and landlords barred from evicting tenants who do not pay. Ro Khanna dropped his wealth tax threshold from $1 billion to $50 million. James Talarico told a forum that capitalism and white supremacy are the same oppressive system and that oil and gas is the cassette tape business. Abdul El-Sayed denied his own defund the police record until CNN produced the audio. They want ICE abolished, the jails emptied, bail eliminated, and boys in girls’ locker rooms, and they only stop saying it out loud when a camera shows up. Give them the House and none of it is theoretical anymore.